overview - alliance bank malaysia berhad · 698,446 656,621 the following tables present the...

Overview

(a)

(b)

(c)

In summary, the capital management process involves the following:

(i)

(ii)

(iii)

Bank Negara Malaysia's ("BNM") guidelines on capital adequacy require Alliance Islamic Bank Berhad ("the Bank") to maintain an adequate level of capital to withstand potential losses arising from its operations. BNM's capital adequacy guidelines cover 3 main aspects:

Pillar 1 - covers the calculation of risk-weighted assets for credit risk, market risk and operational risk.

Pillar 2 - involves assessment of other risks (e.g. rate of return rate risk in the banking book, liquidity risk and concentration risk) not covered under Pillar 1. This promotes adoption of forward-looking approaches to capital management and stress testing / risk simulation techniques.

Pillar 3 - covers disclosure and external communication of risk and capital information by banks.

The Bank maintains a strong capital base to support its current activities and future growth, to meet regulatory capital requirements at all times and to buffer against potential losses. To ensure that risks and returns are appropriately balanced, the Bank has implemented a Group-wide Integrated Risk Management Framework, with guidelines for identifying, measuring, and managing risks. This process includes quantifying and aggregating various risks in order to ensure the Bank has sufficient capital to cushion unexpected losses and remain solvent.

Monitoring of regulatory capital and ensuring that the minimum regulatory requirements and approved internal ratios are adhered to.

Estimation of capital requirements based on ongoing forecasting and budgeting process.

Regular reporting of regulatory and internal capital ratios to management.

In addition, the Bank's capital adequacy under extreme but plausible stress scenarios are periodically assessed via a Group-wide stress test exercise. The results of the stress tests are reported to senior management, to provide them with an assessment of the financial impact of such events on the Group's earnings and capital. The Bank's Pillar 3 Disclosure is governed by the Bank Disclosure Policy on Capital Adequacy Framework for Islamic Banks ("CAFIB") - Pillar 3 which sets out the minimum disclosure standards, the approach for determining the appropriateness of information disclosed and the internal controls over the disclosure process which covers the verification and review of the accuracy of information disclosed.

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ALLIANCE ISLAMIC BANK BERHAD

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CONTENTS PAGES

1.0 Scope of Application 3

2.0 Capital 3 - 62.1 Capital Adequacy Ratios 42.2 Capital Structure 42.3 Risk Weighted Assets ("RWA") and Capital Requirements 5 - 6

3.0 Credit Risk 7 - 213.1 Distribution of Credit Exposures 8 - 113.2 Past Due Financing and Advances Analysis 123.3 Impaired Financing and Advances Analysis 13 - 143.4 Assignment of Risk Weights for Portfolios

Under the Standardised Approach 15 - 183.5 Credit Risk Mitigation 19 - 203.6 Off-Balance Sheet Exposures and Counterparty Credit Risk 21

4.0 Market Risk 22 - 23

5.0 Operational Risk 24

6.0 Rate of Return Risk in the Banking Book 24 - 25

7.0 Shariah Governance Disclosures and 26 Profit Sharing Investment Account ("PSIA")

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1.0 Scope of Application

2.0 Capital

(i)

(ii)

(iii)

The Pillar 3 Disclosure provided in this document is in respect of the Bank, which is involved in Islamic banking financial services.

There are no significant restrictions or other major impediments on transfer of funds or regulatory capital between the Bank and its holding company, Alliance Bank Malaysia Berhad.

There were no capital deficiencies in the Bank as at the financial period end.

The capital adequacy information is computed in accordance with Capital Adequacy Framework for Islamic Banks. The Bank has adopted the Standardised Approach for credit risk and market risk, and Basic Indicator Approach for operational risk.

The capital management of the Bank is under the purview of Alliance Bank Group's ("the Group") capital management with the objectives:

To maintain sufficient capital resources to meet the regulatory capital requirements as set forth by BNM; To maintain sufficient capital resources to support the Bank’s risk appetite and to enable future business growth; and

To meet the expectations of key stakeholders, including shareholders, investors, regulators and rating agencies.

In line with this, the Bank aims to maintain capital adequacy ratios that are above the regulatory requirement, while balancing shareholders’ desire for sustainable returns and high standards of prudence. The Bank carries out stress testing to estimate the potential impact of extreme but plausible events on the Bank’s earnings, statement of financial position and capital. The results of the stress tests are to facilitate the formulation of action plans in advance if the stress tests reveal that the Group’s capital will be adversely affected. The results of the stress tests are tabled to the Group Risk Management Committee for approval. The Bank’s regulatory capital are determined under Capital Adequacy Framework for Islamic Banks and their capital ratios comply with the prescribe capital adequacy ratios.

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2.0 Capital (contd.)

2.1 Capital Adequacy Ratios

The capital adequacy ratios of the Bank are as follows:

2015 2014

Before deducting proposed dividendsCET I/ Tier I capital ratio 11.013% 13.426%Total capital ratio 11.731% 14.134%

After deducting proposed dividendsCET I/ Tier I capital ratio 11.013% 13.113%Total capital ratio 11.731% 13.821%

2.2 Capital Structure

2015 2014RM'000 RM'000

CET I Capital

Paid-up share capital 300,000 300,000 Retained profits 162,948 153,455 Statutory reserve 192,457 177,346 Revaluation reserves 1,637 (4,877)

657,042 625,924 Less: Regulatory adjustment - Goodwill and other intangibles (440) (215)

- Deferred tax assets - (2,010) - 55% of revaluation reserves (900) - Total CET I Capital / Total Tier I Capital 655,702 623,699

Tier II Capital

Collective assessment allowance 42,744 32,922 Total Tier II Capital 42,744 32,922 Total Capital 698,446 656,621

The following tables present the components of Common Equity Tier I ("CET I"), Tier I and Tier II capital:

The capital adequacy ratios of the Bank are computed in accordance with Bank Negara Malaysia's Capital Adequacy Framework for Islamic Banks issued on 28 November 2012. The Framework sets out the approach for computing regulatory capital adequacy ratios, as well as the levels of those ratios at which banking institutions are required to operate. The framework is to strengthen capital adequacy standards, in line with the requirements set forth under Basel III. The risk-weighted assets of the Bank are computed using the Standardised Approach for credit risk and market risk, and the Basic Indicator Approach for operational risk.

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2.3 Risk Weighted Assets ("RWA") and Capital Requirements

Regulatory Capital Requirements

The following table presents the minimum regulatory capital requirement of the Bank:

Risk-

Gross Net Weighted Capital

2015 Exposures Exposures Assets Requirements

Exposure Class RM'000 RM'000 RM'000 RM'000

(i) Credit RiskOn-balance sheet exposures:Sovereigns/Central banks 1,446,029 1,446,029 - - Banks, Development Financial Institutions ("DFIs") and Multilateral Development Banks ("MDBs") 877,398 877,398 175,479 14,038Insurance Companies, Securities Firm and Fund Managers 8,046 8,046 8,046 644Corporates 1,756,914 1,736,124 1,492,108 119,369Regulatory retail 3,403,349 3,350,191 2,535,271 202,821Residential Real Estate ("RRE") financing 1,606,086 1,605,644 793,670 63,494Higher risk assets 18 18 27 2Other assets 25,759 25,759 25,759 2,061Defaulted exposures 32,647 32,517 38,251 3,060Total on-balance sheet exposures 9,156,246 9,081,726 5,068,611 405,489

Off-balance sheet exposures:Credit-related off-balance sheet exposures 622,406 621,228 501,594 40,127Defaulted exposures 484 475 712 57Total off-balance sheet exposures 622,890 621,703 502,306 40,184

Total on and off-balance sheet exposures 9,779,136 9,703,429 5,570,917 445,673

(ii) Market Risk (Note 4.0)

Rate of return risk - - -

(iii) Operational Risk - - 382,988 30,639

Total 9,779,136 9,703,429 5,953,905 476,312

Long Position

Short Position

- -

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2.3 RWA and Capital Requirements (contd.)

Regulatory Capital Requirements (contd.)

The following table presents the minimum regulatory capital requirement of the Bank (contd.):

Risk-

Gross Net Weighted Capital

2014 Exposures Exposures Assets Requirements


(i) Credit RiskOn-balance sheet exposures:Sovereigns/Central banks 1,316,961 1,316,961 - - Banks, DFIs and MDBs 733,043 733,043 157,507 12,601Insurance Companies, Securities Firm and Fund Managers 11 11 11 1Corporates 1,381,449 1,364,409 1,137,650 91,012Regulatory retail 2,373,391 2,333,521 1,764,462 141,157RRE financing 1,471,792 1,471,208 693,754 55,500Higher risk assets 43 43 65 5Other assets 19,138 19,138 19,138 1,531Defaulted exposures 43,356 43,351 49,407 3,953Total on-balance sheet exposures 7,339,184 7,281,685 3,821,994 305,760

Off-balance sheet exposures:Credit-related off-balance sheet exposures 549,852 549,516 424,065 33,925Defaulted exposures 666 666 979 78Total off-balance sheet exposures 550,518 550,182 425,044 34,003

Total on and off-balance sheet exposures 7,889,702 7,831,867 4,247,038 339,763

(ii) Market Risk (Note 4.0)

Rate of return risk - - -

(iii) Operational Risk - - 398,484 31,879

Total 7,889,702 7,831,867 4,645,522 371,642

Note:The Bank does not use Profit-sharing Investment Account ("PSIA") as a risk absorbent mechanism.

The Bank does not have exposure to any Large Exposure Risk for equity holdings specificed in BNM's Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes.

Long Position

Short Position

- -

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3.0 Credit Risk

Credit Risk Management

Impaired Financing and Provisions

Credit risk is the risk of financial loss resulting from the failure of the Bank’s customers or counterparties to fulfil their contractual obligations to repay their financing or settle financial commitments. Credit risk arises mainly from financing and advances activities and holding of debt securities.

The Board, via the Group Risk Management Committee ("GRMC"), established a Credit Risk Management Framework ("CRMF") which outlines the principles for managing credit risk in the Bank. The CRMF covers the credit approving structure, risk policies framework, the credit process, collateral management, review, portfolio risk management, collection, problem credit management, rating, infrastructure and stress tests. Credit approval authority is delegated to underwriters based on their experience and seniority. Credit granting decisions are based on expert judgement supplemented with credit ratings; risk reward is a major consideration in financing pricing. Larger financing are approved by the Management Credit Committee. Policy financing are subject to concurrence by the Executive Committee. Retail financing are subject to portfolio reviews and corporate financing are subject to periodic individual customer or group reviews. Financing with signs of problem will be managed under the Early Warning Framework. Recovery of impaired financing are carried out by specialists independent of the lines of business. Portfolio Review Committee for the respective lines of business, assisted by embedded business risk units, manage the portfolio quality. The process also ensures alignment of business strategy with the Bank's risk appetite. Group Risk Management and business risk units are responsible to assess adequacy and effectiveness of the risk management framework, policies and guidelines. Stress testing is used to ascertain the size of probable losses under a range of scenarios for the financing portfolio and the impact to bottom lines and capital. These stress tests are performed using different market and economic assumptions to assess possible vulnerability and effective mitigating actions when required. The Credit Review Unit under Group Internal Audit reviews the credit processes regularly and recommend corrective measures or enhancements. These reviews provide senior management with assurance that the policies, processes, guidelines and limits are adhered to.

Past due accounts are financing accounts with any payment of principal and/or profit due and not paid, but are not classified as impaired. Financing are classified as impaired if the judgmental or mandatory triggers are activated. Individual assessments are performed on impaired accounts with principal outstanding of RM1 million and above. The discounted cashflow method will be used to determine the recoverable amounts. The remaining financing portfolios are then collectively assessed for impairment allowance provision. Please refer to Note 2(g)(i) of the audited financial statements for accounting policies on impaired financing.

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3.0 Credit Risk (contd.)

3.1 Distribution of Credit Exposures

Geographical Distribution

The following tables represent the Bank's major type of gross credit exposure by geographical distribution. Exposure are allocated to the region in which the customer is located and are disclosed before taking account of any collateral held or other credit enhancements and after allowance for impairment where applicable.

Northern Central Southern Sabah Sarawak

2015 RM'000 RM'000 RM'000 RM'000 RM'000

Cash and short-term funds - 574,277 - - - Financial investments available-for-sale - 1,356,154 - - - Financial investments held-to-maturity - 428,838 - - - Financing and advances 388,633 4,517,991 1,030,279 442,311 139,645 Total on-balance sheet 388,633 6,877,260 1,030,279 442,311 139,645 Financial guarantees 19,221 65,028 10,410 4,081 - Credit related commitments and contingencies 123,475 986,769 186,638 447,313 71,380 Total off-balance sheet 142,696 1,051,797 197,048 451,394 71,380

Total credit exposure 531,329 7,929,057 1,227,327 893,705 211,025

Northern Central Southern Sabah Sarawak

2014 RM'000 RM'000 RM'000 RM'000 RM'000

Cash and short-term funds - 409,451 - - - Financial investments available-for-sale - 1,308,230 - - - Financial investments held-to-maturity - 439,711 - - - Financing and advances 275,628 3,603,595 678,451 361,144 70,137 Total on-balance sheet 275,628 5,760,987 678,451 361,144 70,137 Financial guarantees 19,778 45,007 9,423 3,364 - Credit related commitments and contingencies 76,704 843,283 147,980 486,051 40,333 Total off-balance sheet 96,482 888,290 157,403 489,415 40,333

Total credit exposure 372,110 6,649,277 835,854 850,559 110,470

Geographical region

Geographical region

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3.1 Distribution of Credit Exposures (contd.)

(b) Industry Distribution

The following table represents the Bank's major type of gross credit exposure by sector. The analysis are based on the sector in which the customer is engaged.

Financial, Agriculture,Government Insurance and Transport, Manufacturing, Motor Otherand Central Business Storage and Wholesale & Residential Vehicle Consumer

Bank Services Communication Retail Trade Construction Financing Financing Financing TotalRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

2015

Cash and short-term funds 284,220 290,057 - - - - - - 574,277 Financial investments available-for-sale 499,737 780,126 45,777 15,222 15,292 - - - 1,356,154 Financial investments held-to-maturity 423,739 - 5,099 - - - - - 428,838 Financing and advances - 547,504 36,330 1,709,079 113,988 2,518,031 633,350 960,577 6,518,859 Total on-balance sheet 1,207,696 1,617,687 87,206 1,724,301 129,280 2,518,031 633,350 960,577 8,878,128

Financial guarantees - 2,633 11 73,107 22,555 - - 434 98,740 Credit related commitments and contingencies - 343,829 6,896 734,840 156,697 247,716 443 325,154 1,815,575 Total off-balance sheet - 346,462 6,907 807,947 179,252 247,716 443 325,588 1,914,315

Total credit exposure 1,207,696 1,964,149 94,113 2,532,248 308,532 2,765,747 633,793 1,286,165 10,792,443

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(b) Industry Distribution (contd.)

The following table represents the Bank's major type of gross credit exposure by sector. The analysis are based on the sector in which the customer is engaged. (contd.)

Financial, Agriculture,Government Insurance and Transport, Manufacturing, Motor Otherand Central Business Storage and Wholesale & Residential Vehicle Consumer

Bank Services Communication Retail Trade Construction Financing Financing Financing TotalRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

2014

Cash and short-term funds 323,099 86,352 - - - - - - 409,451 Deposits and placements with banks and other financial institutions - - - - - - - - - Financial assets held-for-trading - - - - - - - - - Financial investments available-for-sale 423,332 818,294 41,023 15,175 10,406 - - - 1,308,230 Financial investments held-to-maturity 434,574 - 5,137 - - - - - 439,711 Financing and advances - 302,935 19,231 1,197,694 43,021 2,230,198 354,541 841,335 4,988,955 Total on-balance sheet 1,181,005 1,207,581 65,391 1,212,869 53,427 2,230,198 354,541 841,335 7,146,347

Financial guarantees - 2,630 71 73,964 518 - - 389 77,572 Credit related commitments and contingencies - 177,002 2,477 590,487 41,126 449,221 1,193 332,845 1,594,351 Total off-balance sheet - 179,632 2,548 664,451 41,644 449,221 1,193 333,234 1,671,923

Total credit exposure 1,181,005 1,387,213 67,939 1,877,320 95,071 2,679,419 355,734 1,174,569 8,818,270

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(c) Residual Contractual Maturity

Up to 1 month >1-3 months >3-6 months >6-12 months >1 year TotalRM'000 RM'000 RM'000 RM'000 RM'000 RM'000

2015

Cash and short-term funds 574,277 574,277 Financial investments 213,576 403,688 200,863 50,373 916,492 1,784,992 Financing and advances 1,210,597 292,901 262,404 193,271 4,584,536 6,543,709 Other asset balances 118 80 120 241 294,160 294,719 Total on-balance sheet exposure 1,998,568 696,669 463,387 243,885 5,795,188 9,197,697

2014

Cash and short-term funds 409,451 - - - - 409,451 Financial investments 153,678 403,400 100,037 20,068 1,070,758 1,747,941 Financing and advances 878,579 289,019 188,149 159,990 3,485,480 5,001,217 Other asset balances 796 26 39 77 230,795 231,733 Total on-balance sheet exposure 1,442,504 692,445 288,225 180,135 4,787,033 7,390,342

The following table represents the residual contractual maturity for major types of gross credit exposures for on-balance sheet exposures of financial assets of the Bank:

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3.2 Past Due Financing and Advances Analysis

Past due financing and advances are analysed as follows:

2015 2014RM'000 RM'000

Past due up to 1 month 223,542 216,694 Past due > 1 - 2 months 59,122 54,298 Past due > 2 - 3 months 10,255 9,464

292,919 280,456

Past due financing and advances analysed by sector are as follows:

2015 2014RM'000 RM'000

Financial, insurance and business services 5,022 1,652 Transport, storage and communication 972 672 Agriculture, manufacturing, wholesale & retail trade 21,900 11,258 Construction 2,510 2,254 Residential financing 86,664 100,375 Motor vehicle financing 86,482 59,861 Other consumer financing 89,369 104,384

292,919 280,456

Past due financing and advances analysed by significantgeographical areas:

2015 2014RM'000 RM'000

Northern region 25,323 11,395 Central region 183,157 208,483 Southern region 60,743 44,265 Sabah region 20,123 13,601 Sarawak region 3,573 2,712

292,919 280,456

Past due but not impaired financing and advances are financing where the customers have failed to make a principal or profit payment when contractually due, and includes financing which are due one or more days after the contractual due date but less than 3 months.

(a)

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3.3 Impaired Financing and Advances Analysis

Impaired financing and advances analysed by sectors:

2015 2014RM'000 RM'000

Financial, insurance & business services 123 470 Transport, storage and communication 546 521 Agriculture, manufacturing, wholesale & retail trade 1,481 35,381 Construction 962 1,248 Residential financing 31,403 23,392 Motor vehicle financing 3,715 3,109 Other consumer financing 10,150 12,730

48,380 76,851

Impairment allowances on impaired financing and advances analysed by sectors:

Individual

impairment Individual

Individual Collective (Write-back)/ impairment

impairment impairment Made during write-off

allowance allowance the year (net) for the year

RM'000 RM'000 RM'000 RM'000

2015

Financial, insurance & business 4651 servicesTransport, storage & communication 480 Agriculture, manufacturing, - - wholesale & retail trade 581 18,010 (5,063) (12,860) Construction 914 Residential financing 210 6,603 (109) Motor vehicle financing 6,909 Other consumer financing 559 17,878 (320)

1,350 55,445 (5,492) (12,860)

2014

Financial, insurance & business services - 2,336 - - Transport, storage & communication - 400 - - Agriculture, manufacturing, wholesale & retail trade 18,504 15,934 1,388 (848) Construction - 496 - - Residential financing 415 6,175 195 (929) Motor vehicle financing - 4,233 - - Other consumer financing 879 16,103 879 (1,306)

19,798 45,677 2,462 (3,083)

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3.3 Impaired Financing and Advances Analysis (contd.)

Impaired financing and advances and impairment allowances by geographical areas:

Impaired Individual Collective

financing and impairment impairment

advances allowance allowance

RM'000 RM'000 RM'000

2015

Northern region 3,020 - 5,039 Central region 35,754 1,350 37,410 Southern region 7,450 - 8,486 Sabah region 1,703 - 3,597 Sarawak region 453 - 913

48,380 1,350 55,445

2014

Northern region 15,685 12,860 3,868 Central region 52,948 6,938 31,852 Southern region 5,836 - 6,697 Sabah region 2,160 - 2,906 Sarawak region 222 - 354

76,851 19,798 45,677

Movement in financing impairment allowances are analysed as follows:

2015 2014RM'000 RM'000

Individual assessment allowance:

At beginning of year 19,798 21,635 Allowance made during the year (net) (5,492) 2,462 Amount written-off (12,860) (3,083) Transfer (to)/from collective assessment allowance (96) (1,216) At end of year 1,350 19,798

Collective assessment allowance:

At beginning of year 45,677 51,194 Allowance made during the year (net) 26,553 11,278 Amount written-off (16,881) (18,011) Transfer from/(to) individual assessment allowance 96 1,216 At end of year 55,445 45,677

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3.4 Assignment of Risk-Weights for Portfolio Under the Standardised Approach

Insurance Totalcompanies, exposures

Securities after Total 2015 Sovereigns Banks, firms and Higher netting and Risk-Risk- /Central DFIs and Fund Regulatory RRE risk Other credit risk WeightedWeights banks MDBs managers Corporates retail financing assets assets mitigation Assets

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

0% 1,506,029 - - 86,143 - - - - 1,592,172 - 20% - 877,398 - 211,526 - - - - 1,088,924 217,785 35% - - - - - 790,632 - - 790,632 276,721 50% - - - - 1,592 594,519 - - 596,111 298,056 75% - - - - 3,450,306 5,820 - - 3,456,126 2,592,094 100% - - 19,380 1,796,610 92,609 231,510 - 25,759 2,165,868 2,165,868 150% - - - 4 13,532 - 60 - 13,596 20,393 Total exposures 1,506,029 877,398 19,380 2,094,283 3,558,039 1,622,481 60 25,759 9,703,429 5,570,917

Risk-weighted assets by exposures - 175,480 19,380 1,838,921 2,701,432 809,855 90 25,759 5,570,917

Average risk weight - 20% 100% 88% 76% 50% 150% 100% 57%

Deduction from Capital base - - - - - - - - -

Exposures after netting and credit risk mitigation

The following tables present the credit exposures by risk-weights and after credit risk mitigation:

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3.4 Assignment of Risk-Weights for Portfolio Under the Standardised Approach (contd.)

Insurance Totalcompanies, exposures

Securities after Total 2014 Sovereigns Banks, firms and Higher netting and Risk-Risk- /Central DFIs and Fund Regulatory RRE risk Other credit risk WeightedWeights banks MDBs managers Corporates retail financing assets assets mitigation Assets

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

0% 1,376,961 - - 80,783 - - - - 1,457,744 - 20% - 696,716 - 182,470 - - - - 879,186 175,837 35% - - - - - 681,801 - - 681,801 238,630 50% - 36,327 - 1,255 1,807 549,537 - - 588,926 294,463 75% - - - - 2,535,167 241,072 - - 2,776,239 2,082,179 100% - - 11 1,342,472 59,728 10,708 - 19,138 1,432,057 1,432,057 150% - - - 2,244 13,585 - 85 - 15,914 23,872 Total exposures 1,376,961 733,043 11 1,609,224 2,610,287 1,483,118 85 19,138 7,831,867 4,247,038

Risk-weighted assets by exposures - 157,506 11 1,382,959 1,982,385 704,911 128 19,138 4,247,038

Average risk weight - 21% 100% 86% 76% 48% 150% 100% 54%

Deduction from Capital base - - - - - - - - -

Exposures after netting and credit risk mitigation

The following tables present the credit exposures by risk-weights and after credit risk mitigation (contd.):

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2015

For the purpose of determining counterparty risk-weights, the Bank uses external credit assessments from Rating Agency Malaysia ("RAM"), Malaysian Rating Corporation ("MARC"), Standard and Poor ("S&P"), Moody's and Fitch. In the context of the Bank's portfolio, external credit assessments are mainly applicable to banks/financial institutions and rated corporations. The Bank follows the process prescribed under BNM CAFIB-Basel II to map the ratings to the relevant risk weights. The ratings are monitored and updated regularly to ensure that the latest and most appropriate risk-weights are applied in the capital computation.

The following tables show the rated exposures according to rating by Eligible Credit Assessment Institutions ("ECAIs"), or as prescribed under the CAFIB:

Total

Moody'sAaa to Aa3 /

P-1A1 to A3 /

P-2Baa1 to Ba3 /

P-3B1 to C /

Others Unrated

S&PAAA to AA- /

A-1A+ to A- /

A-2 BBB+ to BB- / A-3B+ to D /

Others Unrated

FitchAAA to AA- /

F1+, F1A+ to A- /

A-2BBB+ to BB- /

F3 B+ to D Unrated

RAMAAA to AA3 /

P-1A+ to A3 /

P-2BBB1+ to BB3 /

P-3B to D /

NP Unrated

MARCAAA to AA- /

MARC-1A+ to A- / MARC-2

BBB+ to BB- / MARC-3

B+ to D / MARC-4 Unrated

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000On and Off Balance-Sheet Exposures

(i) Exposures risk weighted using Sovereigns and

Central Banks rating

Sovereigns and Central Banks (See Note 1) - 1,506,029 - - - 1,506,029 Corporates - 86,143 - - - 86,143

- 1,592,172 - - - 1,592,172

(ii) Exposures risk weighted using Banking

Institutions long term rating

Banks, MDBs and FDIs 618,942 248,424 - - 10,032 877,398

Exposures risk weighted using Banking

Institutions short term rating

Banks, MDBs and FDIs - 618,942 248,424 - - 10,032 877,398

(iii) Exposures risk weighted using Corporate long term

rating

Public Sector Entities - - - - - - Corporates 211,526 - - - 1,817,907 2,029,433 Insurance Cos, Securities Firms & Fund Managers - - - - 19,380 19,380

Exposures risk weighted using Corporate short term

rating

Public Sector Entities - - - - - - Corporates - - - - - - Insurance Cos, Securities Firms & Fund Managers - - - - - -

211,526 - - - 1,837,287 2,048,813

Note 1: The Federal Government and Central Bank of Malaysia are accorded 0% risk weight as provided under the CAFIB.

*Upper Range = Long Term Rating, Lower Range = Short Term Rating

Exposure Class

Ratings by Approved ECAIs

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2014

Note:

The following tables show the rated exposures according to rating by ECAIs (contd.):

There is no outstanding securitisation contract at the Bank that required disclosure of ratings and short term rating of securitisation by approved ECAIs.

Total

Moody'sAaa to Aa3 /

P-1A1 to A3 /

P-2Baa1 to Ba3 /

P-3B1 to C /

Others Unrated

S&PAAA to AA- /

A-1A+ to A- /

A-2 BBB+ to BB- / A-3B+ to D /

Others Unrated

FitchAAA to AA- /

F1+, F1A+ to A- /

A-2BBB+ to BB- /

F3 B+ to D Unrated

RAMAAA to AA3 /

P-1A+ to A3 /

P-2BBB1+ to BB3 /

P-3B to D /

NP Unrated

MARCAAA to AA- /

MARC-1A+ to A- / MARC-2

BBB+ to BB- / MARC-3

B+ to D / MARC-4 Unrated

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000On and Off Balance-Sheet Exposures

(i) Exposures risk weighted using Sovereigns and

Central Banks rating

Sovereigns and Central Banks (See Note 1) - 1,376,961 - - - 1,376,961 Corporates - 80,783 - - 80,783

- 1,457,744 - - - 1,457,744

(ii) Exposures risk weighted using Banking

Institutions long term rating

Banks, MDBs and FDIs 447,255 249,461 - - 36,327 733,043

Exposures risk weighted using Banking

Institutions short term rating

Banks, MDBs and FDIs - - - - - - 447,255 249,461 - - 36,327 733,043

(iii) Exposures risk weighted using Corporate long term

rating

Public Sector Entities - - - - - - Corporates 182,470 - - - 1,363,011 1,545,481 Insurance Cos, Securities Firms & Fund Managers - - - - 11 11

Exposures risk weighted using Corporate short term

rating

Public Sector Entities - - - - - - Corporates - - - - - - Insurance Cos, Securities Firms & Fund Managers - - - - - -

182,470 - - - 1,363,022 1,545,492

Note 1: The Federal Government and Central Bank of Malaysia are accorded 0% risk weight as provided under the CAFIB.

*Upper Range = Long Term Rating, Lower Range = Short Term Rating

Exposure Class

Ratings by Approved ECAIs

18


(776882-V)


3.5 Credit Risk Mitigation ("CRM")

Exposures Exposures

covered by covered by Exposures

guarantees/ eligible covered by

Exposure credit financial other eligible

2015 before CRM derivatives collateral collateral


Credit Risk

On-balance sheet exposures: - - - Sovereigns/Central banks 1,446,029 - - - Banks, DFIs and MDBs 877,398 Insurance Companies, Securities Firm - - - and Fund Managers 8,046 - - - Corporates 1,756,914 - 20,790 - Regulatory retail 3,403,349 - 53,158 - RRE financing 1,606,086 - 441 - Higher risk assets 18 - - Other assets 25,759 - - - Defaulted exposures 32,647 130 Total on-balance sheet exposures 9,156,246 - 74,519 -

Off-balance sheet exposuresOff-balance sheet exposures other than OTC derivatives or credit derivatives 622,406 1,178 Defaulted exposures 484 9 Total off-balance sheet exposures 622,890 - 1,187 - Total on and off-balance sheet exposures 9,779,136 - 75,706 -

As a practical approach towards mitigating credit risk, the Bank accepts a wide range of collaterals. Main types of collateral acceptable to the Bank include cash, guarantees, commercial and residential real estate, and physical collateral/ financial collateral, e.g. motor vehicles or shares. Guarantees are accepted only when the financial standing of the guarantors have been ascertained. However, for capital computation purposes, Basel II adopts more restrictive rules on collaterals that qualify as credit mitigants. As a result, not all of the collaterals accepted by the Bank can be used to reduce our capital adequacy requirement. The following tables represent the Bank's credit exposure including off-balance sheet items under the standardised approach, the total exposure (after, where applicable, eligible netting benefits) that is covered by eligible guarantees and credit derivatives; and eligible collateral after haircuts, allowed under the Capital Adequacy Framework for Islamic Banks.

19


(776882-V)


3.5 Credit Risk Mitigation ("CRM") (contd.)

Exposures Exposures

covered by covered by Exposures

guarantees/ eligible covered by

Exposure credit financial other eligible

2014 before CRM derivatives collateral collateral


Credit Risk

On-balance sheet exposures:Sovereigns/Central banks 1,316,961 - - - Banks, DFIs and MDBs 733,043 - - - Insurance Companies, Securities Firm and Fund Managers 11 - - - Corporates 1,381,449 - 17,041 - Regulatory retail 2,373,391 - 39,870 - RRE financing 1,471,792 - 584 - Higher risk assets 43 - - - Other assets 19,138 - - Defaulted exposures 43,356 - 5 - Total on-balance sheet exposures 7,339,184 - 57,500 -

Off-balance sheet exposures:Off-balance sheet exposures other than OTC derivatives or credit derivatives 549,852 - 336 - Defaulted exposures 666 - - - Total off-balance sheet exposures 550,518 - 336 - Total on and off-balance sheet exposures 7,889,702 - 57,836 -

20


(776882-V)


3.6 Off-Balance Sheet Exposures and Counterparty Credit Risk

Positive

Fair Value Credit Risk-

Principal of Derivative Equivalent Weighted

Amount Contracts Amount Assets

2015 RM'000 RM'000 RM'000 RM'000

Credit-related exposures

Direct credit substitutes 74,284 - 74,284 74,284 Transaction-related contingent items 46,496 - 23,248 23,248 Short-term self-liquidating trade- related contingencies 24,455 - 4,891 4,891 Irrevocable commitments to extent credit:- maturity exceeding one year 555,502 - 277,751 238,730 - maturity not exceeding one year 1,213,578 - 242,716 161,153

1,914,315 - 622,890 502,306

Positive

Fair Value Credit Risk-

Principal of Derivative Equivalent Weighted

Amount Contracts Amount Assets

2014 RM'000 RM'000 RM'000 RM'000

Credit-related exposures

Direct credit substitutes 46,299 - 46,299 46,299 Transaction-related contingent items 26,890 - 13,445 13,445 Short-term self-liquidating trade- related contingencies 31,273 - 6,255 6,255 Irrevocable commitments to extent credit:- maturity exceeding one year 570,089 - 285,045 226,604 - maturity not exceeding one year 997,372 - 199,474 132,441

1,671,923 - 550,518 425,044

Off-balance sheet exposures of the Bank are mainly from the commitments to extend credit including the unutilised or undrawn portions of credit facilities.

The off-balance sheet exposures and their related counterparty credit risk of the Bank are as follows:

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(776882-V)

4.0 Market Risk

Market Risk Management

(i)

(ii)

(iii)

(iv)

(v)

For Islamic banking, market risk refers to fluctuations in values of tradable, marketable or leaseable assets (including sukuk) and in off-balance sheet individual portfolios such as restricted investment accounts. This risk relates to the current and future volatility of market values of specific assets, e.g. the market value of a Sukuk or Murabahah assets purchased to be delivered over a specific period; and of foreign exchange rates.

The governance structure for market risk management starts with the Board of Directors which has the overall oversight on market risk management and defines the risk philosophy, principles and core policies. The Board is in turn assisted by the Group Risk Management Committee ("GRMC") which is principally responsible for providing oversight on risk management activities. Its responsibilities include reviewing and approving risk management policies, risk exposures and limits whilst ensuring the necessary infrastructure and resources are in place. At Senior Management level, the Group Assets and Liabilities Management Committee ("GALCO") manages the Bank’s market risk by reviewing and recommending market risk frameworks and policies; ensuring that market risk limits and parameters are within the approved thresholds; and aligning market risk management with business strategy and planning. Organisationally, market risks are managed collectively via the Three Lines of Defence concept. Financial Markets as the risk taking unit assumes ownership of the risk and manages the risk within the approved policies, risk limits and parameters as set by the GRMC or GALCO. The risk control function is undertaken by Group Risk Management which provides independent monitoring, valuation and reporting of the market exposures. This is supplemented by periodic audit checking/sampling by Internal Audit. For the Bank, market risk is managed on an integrated approach which involves the following processes:

Identification of market risk in new products and changes in risk profiles of existing exposures.

Assessment of the type and magnitude of market risks which takes into account the activity and market role undertaken.

Adoption of various market risk measurement tools and techniques to quantify market risk exposures.

Adoption of the Three Lines of Defence concept for monitoring of market risk; Business Units forming the 1st Line, Group Market Risk Management as the 2nd Line and Internal Audit functioning as the 3rd Line.

Scheduled and exception reporting on market risk exposures.

Market risk exists in the Bank's activities in bonds and money market instruments which are transacted primarily by Financial Markets (treasury) department. Trading positions are held intentionally for short-term resale and with the intent of benefiting from actual or expected short-term price movements while banking book positions are held until maturity or as available-for-sale. Hence, these positions are susceptible to market movements. These exposures are governed by approved policies, risk limits and pararmeters which are set vis-a-vis the Bank's risk appetite and strategy. Besides that, treasury activities are monitored and reported independently by Group Market Risk on a daily basis. Any limit breaches or exceptions are reported to GALCO and GRMC.

22


(776882-V)

4.0 Market Risk (contd.)

Hedging Policies and Strategies

Market risk capital charge

Regulatory capital requirements

Risk-

Weighted Capital

Assets Requirements

2015 RM'000 RM'000

Profit rate risk- General profit rate risk - - - Specific profit rate risk - -

- -

Equity risk- General profit rate risk - - - Specific profit rate risk - -

- -

Foreign exchange risk - -

- -

2014

Profit rate risk- General profit rate risk - - - Specific profit rate risk - -

- -

Equity risk- General profit rate risk - - - Specific profit rate risk - -

- -

Foreign exchange risk - -

- -

The risk-weighted assets and capital requirements for the various categories of risk under market risk are as follows:

The Bank had established a hedging policy which outlines the broad principles and policies governing hedging activities by the Bank. Generally, the Bank enters into hedges to manage or reduce risk exposures. All hedging strategies are approved by the GALCO and monitored independently by Group Market Risk. Further, all hedging strategies are designated upfront and recorded separately under the hedging portfolios. Hedging positions and effectiveness are monitored and reported monthly to management.

For the Bank, the market risk charge is computed on the standardised approach and the capital charges are mainly on the trading portfolios for Islamic debt securities/sukuk.

23


(776882-V)

5.0 Operational Risk

Operational Risk Management

(i) Oversight and implementation of the Operational Risk Management ("ORM") Framework;(ii) Establishment of risk appetite and the provision of strategic and specific directions;(iii) Regular review of operational initiatives, risks reports and profiles;(iv) Addressing operational risk issues; and(v) Ensuring compliance with regulatory and internal requirements including disclosures.

6.0 Rate of Return Risk in the Banking Book

Risk Governance

Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.

Management, escalation and reporting of operational risks are instituted through the Group Operational Risk Management Committee, Group Risk Management Committee as well as the Board. The responsibilities of the Committees and Board include the following:

The Bank practices operational risk management as outlined in the ORM Framework, in accordance with Basel and regulatory guidelines. The Bank applies operational risk tools and methodologies in the identification, assessment, measurement, control and monitoring of operational risks. Other efforts by the Bank include the ORM awareness training which is given to all staff, and regular business continuity and disaster recovery plans. The Bank adopts Basic Indicator Approach for computation of operational RWA.

Rate of return risk in the banking book ("RORBB") arises from exposure of banking book positions to profit rate movements. Changes in profit rate affects the Bank's earnings by changing its net profit income and the level of other profit rate sensitive income and expenses. It also affects the underlying value of banking assets, liabilities and off-balance sheet instruments as the present value of future cash flows change when profit rate change.

RORBB is managed collectively by GALCO, Financial Markets, Group Finance and Group Risk Management. Each of the above parties has clearly defined roles and responsibilities to provide oversight and manage RORBB within the defined framework and structure as approved by the Board of Directors/ GRMC. GALCO assumes the overall responsibility in managing RORBB by setting the directions, strategy and risk limits/parameters for the Bank. Financial Markets is tasked to execute the approved strategy by managing the asset liabilities as well as the funding and liquidity needs of the Bank. Group Finance and Group Risk Management provide support in respect of risk monitoring and reporting of the banking book exposures; and ensuring regulatory as well as accounting requirements are met.

24


(776882-V)

6.0 Rate of Return Risk in the Banking Book (contd.)

RORBB Management

The guiding principles in managing RORBB include:

(i)

(ii)

(iii) Setting proper gapping limits and the limits monitored closely.

(iv)

(i)

(ii)

(iii)

- 100 bps + 100 bps - 100 bps + 100 bps

Increase/(Decrease) Increase/(Decrease)

RM'000 RM'000 RM'000 RM'000Impact on net profit incomeRinggit Malaysia (12,430) 12,430 (9,843) 9,843

Impact on Economic valueRinggit Malaysia (41,935) 41,935 (36,352) 36,352

2015 2014

The following tables present the Bank's projected sensitivity to a 100 basis point parallel shock to profit rates across all maturities applied on the Bank's profit sensitivity gap as at reporting date.

Implementing comprehensive RORBB reporting and review processes, and providing aggregate information and sufficient supporting details to enable assessment of the Group's sensitivity to changes in operating conditions.

The Bank uses a range of tools, including the following primary measures to quantify and monitor RORBB:

Repricing gap analysis to measure profit rate from the earnings perspective i.e. impact of profit rate changes to earnings in the short term.

Net profit income simulation to assess the impact of profit rate changes on short term earnings volatility. Economic value of equity ("EVE") simulation which measures long term profit rate exposure through deterioration in capital base based on adverse profit rate movements.

Group Risk Management performs independent monitoring of the profit rate benchmarks to ensure compliance. Any exceptions are reported and appropriate remedial actions are taken, where necessary. Schedule reporting via risk dashboards are provided to Board, Board committees and senior management periodically. The risk dashboards provide a gauge on the RORBB of the Bank. The Bank is guided by BNM's guidelines and Basel standards on management of RORBB.

Checking to ensure that RORBB are accurately measured and any mismatches identified, reviewed and reported monthly to GALCO.

Adopting a prudent approach to manage RORBB in ways that commensurate with the Group's size and business activities. This is achieved via establishing robust RORBB policies, measures and strategies which is complemented by regular monitoring and reporting.

25


(776882-V)

7.0 Shariah Governance Disclosures and Profit Sharing Investment Account ("PSIA")

Displaced Commercial Risk

(i)

(ii) to transfer the Bank's current year profits or retained earnings to the IAH on the basis of hibah.

Shariah Governance Disclosure

(i)

(ii)

- Oversight and implementation of the Shariah Compliance Framework.- Regular review of non-Shariah compliance income and issues.- Addressing non-Shariah compliance findings.- Ensuring compliance with regulatory and internal requirements including disclosures.

(iii)

(iv)

-

-

-

(v)

Non-Shariah Compliant Income And Events

Displaced commercial risk refers to the risk of losses which an Islamic Bank absorbs to make sure that Investment Account Holders ("IAH") are paid with a competitive rate of return. This risk arises when the actual rate of return is lower than returns expected by IAH of an Islamic Bank.

to forgo part or all of the Bank's share of profit to the IAH by way of varying the percentage of profit taken in order to increase the share attributed to the IAH in any particular period; and/or

Shariah Non-Compliance Risk arises from the risk of failure to comply with Shariah rules and principles as determined by Shariah Advisory Councils of Bank Negara Malaysia and the Bank's Shariah Committee. To manage the risks, the Bank has adopted the following guiding principles:

Appointment of qualified Shariah Committee members, whom also serve as Board members; functioning as a ‘bridge’ between the Board and the Shariah Committee.

Escalation and reporting processes of non-Shariah compliance income and issues are well instituted through various committees such as the Shariah Committee and the Board.

Regular assessment on Shariah compliance in the activities and operations of the Bank. The findings of the review are reported to the Shariah Committee for deliberation and decision.

Performing research and studies on Shariah issues, including providing day-to-day Shariah advice and consultancy to relevant parties.

Conducting Shariah-related training and ongoing engagement with relevant parties to raise awareness on Shariah non-compliance risk.

In the event there is no PER balance to be distributed, the Bank may employ the following techniques:-

The profit equalization reserve ("PER") is used as a mechanism to smoothen the returns. This mitigates the displaced commercial risk for an Islamic Bank so that a competitive rate of return can be distributed to its IAH.

The Board of Directors, assisted by the Shariah Committee and Senior Management, provides oversight on Shariah compliance aspects of the Islamic Bank’s overall operations. This amongst others include:

A sound Shariah Compliance Framework which governs the operations of the Bank and outlines the roles of key functionalities within the Bank, including but not limited to the Shariah risk management process. This is in line with the Shariah Governance Framework issued by BNM.

Ongoing Shariah reviews and training to raise risk awareness and ensure compliance to Shariah rules and principles. This incudes:

During the financial period there was 1 Shariah non-compliant event detected from the ongoing reviews of the Bank’s operational processes. Necessary actions had been taken to rectify the Shariah non-compliant event as approved by the Shariah Committee and Board of Directors. There was no resulting Shariah non-compliant income arising from this event. Nonetheless, for the period of review, the Bank continues to recognize insurance commission amounting to RM 245,593 as Shariah non-compliant income. This is arising from the ongoing system enhancement to convert existing fire insurance to takaful for home financing. This Shariah non-compliant income has been purified accordingly as approved by the Shahriah Committee.

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overview - alliance bank malaysia berhad · 698,446 656,621 the following tables present the...

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